The $305.5 billion system now oversees about 70% of its assets internally, most in stocks and bonds, a share that can increase as CalPERS develops capacity to handle private equity, real estate and infrastructure, according to Chief Investment Officer Ted Eliopoulos.

“I think 75, maybe 80%” is the long-term goal, Mr. Eliopoulos said in a Bloomberg Television interview in Sacramento. “It's a big deal.”

The shift would cut fees paid by the system as it reduces the outlook for investing returns amid low interest rates and slow economic growth. The CalPERS board voted last month to decrease its assumed long-term annual rate of return to 7% from 7.5%. Over the next 10 years, it may average gains of 6.2%, according to Wilshire Associates, an outside consultant.

CalPERS spent $279.2 million in fiscal 2016 for external managers, including $178.6 million in fees for oversight of real assets, according to its annual report released this month. It also paid outside managers $344.7 million in performance fees.

'Great deal'

CalPERS pays external private equity managers as much as 150 basis points, or $1.50 per $100 of assets, and real estate managers roughly 50 cents per $100, Mr. Eliopoulos said. By contrast, it currently costs about 4 cents per $100 to manage money internally.

“It's a great deal for the California taxpayer,” he said. “To be able to invest $220 billion at a minimal basis point is a fantastic bargain. But before we employ more of that strategy in the private markets, we have to make sure we can.”

One constraint is CalPERS' inability to match compensation paid to talent in the private sector, Mr. Eliopoulos said. As a public agency, it also operates under different disclosure and governance rules than sovereign wealth funds or Canadian pension systems, many of which manage more of their assets in-house, he said. With only one office in Sacramento, CalPERS lacks the geographic reach it would need to successfully invest in global real estate, private equity or infrastructure deals.

To overcome some of these obstacles, CalPERS is exploring the creation of special purpose vehicles that could compete with private equity firms to buy and manage assets directly, with the freedom to pay private sector compensation. It is also beefing up an in-house team to manage credit investments.

“In order to build an internal capacity to invest in private markets, you have to plan for and be really sure you can execute,” he said.